As the retail forex trading industry grows at an alarming rate, the amount of prop firms coming into market and funding forex traders is also growing rapidly to keep up with demand. All prop firms have their own pros, cons, selling points and serious areas to consider, making it quite a hard task these days to find the best prop trading firm that suits you and your needs.
In this article we are going to look at all of the analysis you need to do on a trading firm to decide whether or not they are the company you should be trading with. We will look at all of the factors you need to consider, to give you the best possible chance at succeeding with a prop firm in 2021. Let’s find out more…
Why Would You Choose To Use A Prop Firm?
We are split for choice with prop firms all offering us a huge amount of capital to trade, with little risk to us – but why would you ever need to use a prop firm?
Forex has a very low barrier to entry, compared to other financial markets. This is due to forex brokers, such as IC Markets for example, offering 1:500 leverage and a very low initial minimum deposit of $200. Even with such a low deposit, with such huge buying power at your disposal you are able to risk up to even 25% of your trading account in a single trade, which certainly isn’t advised!
Let’s assume, like most traders, you are coming into the markets with a maximum of a few thousand dollars. Hedge funds and money managers are bringing back consistent returns of a few percent per month, if that. If we take a $2000 account, working all month for a 2% gain is going to make you a sweet pre-tax profit of $40 – which isn’t worth getting out of bed for. However, this is where prop firms come in, as they can offer you funding of even up to $3,000,000 depending on your experience levels, trading ability and which firm you are looking to trade with!
Prop firms bridge the gap between retail traders and professional money managers. You get access to a huge amount of capital to trade without having to get a job in the firm, relocate, prove years of track record, get a license or go out and hunt for investors.
What Factors To Consider When Looking For The Best Prop Firm
Like anything, prop firms are very different to each other in many ways, some good and some bad. For example, the trading requirements needed to get funded from FTMO are much different from that of 5%ers.
Forex traders typically have a very small edge in the market, over the long term. Very few traders are able to consistently clean out the market and pull out huge profits, especially very few retail traders. For this reason, we need to look at every factor a prop firm has to offer us to ensure we are maximising our chances of success and the likelihood of us making money, instead of just losing our fees.
1. The Company Reputation
Looking at the reputation a prop firm has within the industry is absolutely vital to ensure you are looking to trade with a legitimate company, not a scam. Reviews can really be obtained and collated in a number of ways but I would recommend sticking with TrustPilot and Forex community forums like ForexPeaceArmy to see the true reviews from traders.
For instance, when I was doing a full comprehensive review on Funding Talent, it was important to do my due diligence to see if other traders had the same experience I did. Ideally, alongside all of the reviews, you are looking to see proof of payouts as well. With any reputable prop firm you will be able to find multiple traders on YouTube with payment proof and reviews there, which always massively boosts trust with the company.
I would personally recommend avoiding any prop firm that has a negative reputation, even if they are offering amazing perks and huge capital to traders. With so much money and your time on the line, it’s not worth risking trading for 2 months to pass the challenge, paying $700, then never getting a single dollar paid out.
2. The Age Of The Prop Firm
Frankly new prop firms are popping up out of thin air every single day, which aren’t worth taking the risk on. No matter what they promise you in terms of funding and easy to pass challenges, a long standing prop firm is always going to be best and a much safer choice. This by no means is implying that all new firms are not reliable, but we don’t need to be the traders to find out! I have a full list here of trusted prop firms, should you be interested.
3. Weekend Holding
If you are a swing trader or even a day trader, you will need to be holding trades over the weekends a lot of the time in order to reach your maximum profit potential out of a trade. Annoyingly, due to the potential risks of weekend holding, a lot of prop firms will stop you from leaving trades on the table at Friday market close and will in fact potentially fail you on challenges for not being flat on market close.
For intraday traders looking at opening and closing trades within the space of 1 day, I would recommend a company like FTMO that doesn’t let traders hold over the weekend as it really won’t effect your profit. However, if you’re partial to some longer term trades like I am, a firm like 5%ers that offer weekend holding and longer challenge durations is a much better option.
4. Trading Strategy Restrictions
The majority of highly rated prop firms will allow you to trade most systems, besides high frequency trading. This really shouldn’t be a problem as most high frequency traders aren’t out here looking for funding anyway, but firms do often ban things like hedging or even scalping so it’s something to research before choosing your funding option.
Some funding companies also require you to be flat on high impact news releases, which may become an issue for traders that focus solely on trading the initial news releases.
5. Capital Scaling Options
You may or may not know that a lot of industry leading prop firms offer capital scaling when profit milestones are met. This essentially means that if you are consistently trading on your chosen account size, they will gradually increase that for you, at no extra charge, therefore increasing your profit payout every month – which is great!
Some firms offer this as standard and some don’t offer any type of scaling. For example…
- FTMO don’t offer scaling, but you are allowed up to 3 funded accounts of any value.
- BluFx will double your account size for every 10% of profit obtained.
- Fidelcrest will add 25% of your account balance, every time you obtain a 15% gain in a 3 month period, which every month finishing in the green.
Scaling certainly isn’t the most important factor that makes or breaks the best prop firms but if you’re seriously looking to increase your funding rapidly it is worth considering the options out there.
6. How Realistic Are The Rules?
No matter how much capital a prop firm is willing to give you, if you aren’t able to pass the challenges set out by the firm then it really doesn’t matter! Firms will normally set you a range of perimeters to abide by, that will look something like this…
- Maximum daily drawdown of 5%
- Maximum loss of 10%
- Profit target of 8-12% for milestone
- Minimum number of trading days per month
- Time duration of 30-60 days to complete challenges
- Profit split of between 50-80%
- Monthly payouts
Each firm does it slightly different but this would be the industry average. These kinds of rules make it very achievable to actually pass the challenges and get funded for a profitable trader, but there is still wiggle room depending on your style. For instance, 5%ers offer a much longer challenge time than FTMO do, so if you’re concerned about not being able to gain 10% profit in 20 trading days, you may want to consider seeking funding from that company instead.
7. Education & Backend Offered
As traders, we have to work by percentages, risk to rewards and various other very important metrics to ensure profitability over the long term. If we have no access to a dashboard, statistics or education it can be really hard to make changes to our systems and tweak our trading plans.
The majority of prop firms offer a back end area where you are able to track progress and see a range of stats relevant to your payments and performance. If the company doesn’t have any type of educational content or tracking metrics I would recommend staying away and choosing a prop firm that does have better metrics as this is going to make your life much easier in the long term.
8. Fees and Costs
Being considerate of the pricing and fees you pay for funding is the last thing we need to be looking at. Typically, funding is either obtained by a one time fee, normally refundable on completion of a challenge, or by a recurring monthly payment made to the firm.
Both of these payment methods have their own perks, although I would highly recommend paying for a full challenge and not having any monthly outlay for the trading capital.
In summary, there are 8 things you need to look at when finding the best forex prop firms. These companies offer a great way to take retail traders to the next level in their trading, offering funding and enough capital to actually make a living out of trading, rather than an extra $20 here and there!
Hopefully now you will have all of the tools you need to find the best prop firm for you and get funded! Every firm has pros, cons and selling points so definitely take some time researching every single option. There is also absolutely no reason you cannot work with multiple companies at the same time and obtain even more capital to trade with!
If you have any other areas to consider when choosing the best funding options, please do drop a comment below!